INFLATION TARGETING MONETARY POLICY : INFLATION THRESHOLD IN MALAYSIA, 1970-2011

This paper empirically explores the nonlinear relationship between inflation and GDP growth rate. By using annual data covering from the period of 1980 to 2011, the study applies two regime TAR model developed by Hansen (2000) to find the inflation threshold level which is safe for economic growth. This study explores the interesting policy issues on what level of inflation threshold level should be set by policymakers in order to maintain Malaysia’s economic sustainability. Inflation rate and real GDP growth rate are the main variables used in this study to determine to non linear relationship between these variables. The unit root test is also being applied to determine the stationary of variables